Sterling under pressure despite rising gilt yields
Sterling has lagged the euro and other currencies in recent weeks, during the risk-off moves in financial markets as investors have reduced their dollar exposures. This is despite a notable steepening of the UK yield curve, 30-year gilt yields now at 5.35%, their highest level since the late-1990s. This shows UK assets have failed to benefit from any perception Britain is relatively insulated from a global trade war. True, the Bank of England is expected to cut rates to 3.75% by end-2025 to support the economy. However, investors remain focused on the sustainability of the UK’s public finances. Specifically, that plans to gradually rein-in public sector borrowing from 4% of GDP appear to rely on unrealistic assumptions on spending and optimistic projections for GDP growth. So sterling is unlikely to see a sharp rebound against the euro in the near-future, absent a far broader recovery in financial market risk appetite.
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